The right way to fight economic inequality

A rally promoting protectionism in Warren, Michigan, on April 29, 2025. (Sarah Rice/Bloomberg via Getty Images)

Over the past half-century, there has been a strikingly high correlation between the decline in the percentage of American households considered middle class and the rise of political polarization. Popular support for free markets and free trade is also waning. The U.S. public is upset about automation and good jobs vanishing to Asia, as well as the decline in affordable housing and rules that make it expensive or difficult to land new jobs in new areas. It wants its government to help.  

Unfortunately, since 2016, Washington’s response has mostly been to dust off the old protectionist trade and industrial policies of the distant past – policies that show no signs of improving broad measures of economic performance or bringing back the well-paying manufacturing jobs lost to automation and the rise of China.  

In the United States, the traditional model for helping workers left behind by technological change and international competition has been to rely almost entirely on the tax-and-transfer system. But that model has reached the limits of its usefulness. American workers are unhappy with the level of support they are getting from Washington, but even more unhappy with the form of the support on offer. 

Since 1962, the main federal program designed to help displaced workers has been the Trade Adjustment Assistance (TAA) program. TAA, however, has long been both underfunded and overly restrictive. Although millions of Americans have lost their jobs to the China Shock, at the height of the TAA’s generosity (from 2009 to 2011), only about 250,000 workers per year received assistance under the program. And that help, which came in the form of weekly cash benefits, training vouchers, tax credits, and reimbursements, was always too small to make much of a difference. In fact, the workers most affected by Chinese competition received more in government medical and disability benefits than they did in TAA assistance. 

But TAA has an even bigger problem. On a fundamental level, most Americans want good jobs, not handouts when those jobs vanish. So what would be the most effective, market friendly way for Washington to help them?

Loosening up 

Economists rightly warn against policies that aim to protect jobs but would, in the process, harm productivity and dull the economic incentives on which broad national prosperity depends. What the United States needs instead is a set of policies that would cut across all domains of the economy, widening opportunities for those in the lower and middle income ranks without harming productivity. Indeed, it needs policies that would actually increase productivity. 

Such policies are known as “predistributive” (as opposed to “redistributive”). They aim to mitigate the sources of inequality resulting from the operation of the market. A number of these reforms would both reduce inequality and raise gross domestic product (GDP). Yet past attempts at the federal and state level to pass such reforms have been stymied by private vested interests. 

One key set of reforms Washington should focus on today would increase labor mobility. Around the United States, a range of existing laws and private contractual rules have the unintended but well-documented effect of damaging labor mobility – that is, the ability of workers to change jobs or move to places with better opportunities. Eliminating or restricting the reach of such laws and rules is a prime example of a predistributive policy; doing so would empower workers while simultaneously boosting economic growth. 

A noncompete contract.

The first way to do so would be to target the proliferation of so-called noncompete clauses in standard employment contracts. These clauses, known as “noncompetes,” bar employees of a given firm from working for other employers in the same sector for a set length of time – thereby restricting competition for labor and suppressing wages. The Federal Trade Commission (FTC) has estimated that 30 million American workers – some 20% of the total workforce – are currently subject to noncompete clauses. This group includes many middle-income and low-wage workers. In addition to harming employees, such contractual provisions are blatantly anticompetitive. Some states have made noncompetes unenforceable, yet employers often continue to insist that workers sign them, hoping to exploit the uninformed. 

Federal action to ban noncompetes would have significant distributional consequences. Prohibiting them for workers earning less than $150,000 annually would, according to FTC estimates, boost those workers’ earnings by over $200 billion a year. By way of comparison, the earned income tax credit, the largest cash transfer program for low-income workers, supplements worker earnings by only a third of that amount. 

Last year, the FTC issued a final rule stating that noncompete clauses violate federal antitrust laws. This rule, however, has faced legal challenges, such as one in Texas in which the judge has indicated that the FTC lacks statutory authority to promulgate the ban. Congressional legislation to make the ban into law – legislation that should attract bipartisan support – would stand on much firmer constitutional ground. 

A second obstacle to labor mobility has been erected by many state governments: namely, the proliferation of anticompetitive and anticonsumer occupational licensing rules. Over the past six decades, typically at the behest of local interest groups, states have gone on a licensing spree. In this period, the share of the U.S. labor force subject to licensing requirements has grown fivefold, reaching a full quarter of the national workforce. Not content to regulate doctors, lawyers, and other highly skilled professions, states have imposed ludicrous licensing burdens on florists, manicurists, janitors, hair braiders, and 800 or so other occupations. 

The proliferation of licensing laws is an example of federalism at its worst. Federalism is the principle that political decisions should be made at the level closest to the citizen. Legal scholars and economists have long defended it on several grounds – in particular, that it enhances local accountability, that it accommodates different preferences across localities, and that it allows for experimentation. But for all its putative benefits, federalism comes with major costs. The proliferation of occupational licensing is a stark example of state-level rulemaking run amok. Do security guards really need three years of training? Michigan says so. Do fortune tellers need licensing? In Maryland they do. While some minimal degree of training may be appropriate in some fields – especially those involving consumer safety – such excessively onerous rules, like many of those on the books today, are anticompetitive (they’re typically designed to protect current jobholders at the expense of future ones), raise costs for consumers, and reduce work opportunities for the public at large. 

Congress could induce states to harmonize their licensing regimes, as the Barack Obama Administration tried to push it to do, using the power of the purse. But Congress also has the constitutional power simply to preempt state licensing restrictions. It should use that power, and thereby boost workers’ earning potential and reduce the need for government to supplement their livelihoods. 

A third culprit limiting worker mobility operates at the local level. These days, buying or renting a home in or around New York City, San Francisco, and other desirable (mostly coastal) areas can eat up a prodigious portion of a worker’s income. A primary reason for excessive housing cost is the lack of new construction, permits for which are severely restricted by local zoning laws. Often these laws ban the building of new low-cost multifamily housing. Over the past half-century, cities such as Houston and Atlanta that have eschewed such restrictive housing codes have grown much more rapidly than those that have embraced them. 

Restrictive zoning rules are a huge drag on economic growth. Estimates suggest that the U.S. GDP would be almost 9% higher if zoning laws in just three key metropolitan areas – New York, San Francisco, and San Jose, California – were relaxed to match those in the median American city. Loosening these zoning laws would, within a few years, reduce housing costs so much that it would translate into an additional $8,775 in average wages for workers. Relaxing restrictive zoning laws would be especially helpful for low-income workers, who are currently affected the most by high costs. In the New York area, for example, housing costs eat up 21% of the average lawyer’s earnings, but a much higher 52% of the average janitor’s income.  

Giving a manicure, Queens, New York, May 11, 2022. (Andrea Renault/AFP via Getty Images)

Congress does not have the power to preempt localities on zoning law, but it does have the tools to motivate cities to reform. It could, for example, deny tax-free treatment of municipal bonds issued by cities that refuse to comply. It could also withhold federal highway funds pending such deregulation. 

Easing zoning laws, abolishing unnecessary licensing regulations, and banning noncompetes in employment contracts for all but high earners would merely be the low-hanging fruit of a much-needed predistributive policy agenda that would help American workers help themselves. These and other measures should appeal to both sides of the political aisle. They represent a quintessentially American agenda, one aimed at expanding opportunity for all citizens. Such moves would also reduce toxic political polarization by giving the less well-off a bigger stake in the traditional source of America’s strength: economic freedom.